S&P downgrades Spain’s credit rating

27th April 2012

Last Night saw this announcement from the ratings agency Standard and Poors about Spain.

"Standard & Poor's Ratings Services today said it lowered its long-term sovereign credit rating on the Kingdom of Spain to ‘BBB+' from ‘A'. At the same time, we lowered the short-term sovereign credit rating to ‘A-2′ from ‘A-1′. The outlook on the long-term rating is negative."

So we see a two notch downgrade for the longer -term rating and the negative watch implies that this may not be the last of it.

However regular readers of this blog may well be saying keep up S&P! I analysed her economic weakness on the 11th,16th, 18th and 20th of this month. And of course back in January I wrote this.

What were the reasons behind the downgrade?

Whilst ratings agencies continue their trend of being behind events -when in fact they should be making an effort to get ahead of them- their analysis is often useful. they have presented their analysis in the wrong order but below are the driving forces behind it.

Declining disposable incomes;

Private-sector deleveraging;

Implementation of the government's front-loaded fiscal consolidation plan; and

The uncertain outlook for external demand in many of Spain's key trading partners.

In there is my theme of a weak economy (falling real wages, weak external demand) finding that extra austerity makes the economy even weaker leading to demands for more austerity and repeat. According to S&P the consequence of this is.

"The deterioration in the budget deficit trajectory for 2011-2015, in contrast with our previous projections,"

And of course the banks are always in there somewhere.

"The increasing likelihood that the government will need to provide further fiscal support to the banking sector"

So we return to thoughts about Spain's banking sector which immediately leads us on to her housing market which has seen a boom and now a bust. And as ever we see that the banking sector is in fact being bailed out whilst we also see a nod to something which is emerging out of the shadows of monetary geekery.

"the Bank of Spain-through Target2 overdrafts with the ECB (exceeding €250 billion in March 2012, from around €150 billion at the end of 2011)-has now become the major source of financing Spain's CAD."

By CAD they mean current account deficit and whilst Spain has one it is also true that it has improved from 10% of GDP in 2007 to 3.5% last year.

The punches keep coming in today's economic data

Employment and Unemployment

From Spain's statistics agency.

"The number of employed persons decreases by 374,300 persons in the first quarter of 2012, standing at 17,433,200. The interannual employment rate stands at -3.96%"

The unemployment rate has risen by 1.59% to 24.44% which represents some 5,639,500 Spaniards (up by 365,900). And if we look at youth unemployment (16-24) we see that it has risen by 37,600 in the last quarter to 921,800 or 52%. Chilling isn't it? Thoughts of a lost generation are hard to avoid on reading these numbers especially when we see that it only rose above 20% in early 2008.

Long-term unemployment has also risen as some 1,546,500 Spaniards have now been unemployed for over two years.

What about retail sales?

"The General Retail Trade Index at constant prices registers an interannual variation of -3.9% in March, three tenths lower than that registered in February."

If we look into the detail of the report we see that in real terms this index which is based on 2005=100 is now at 81.4. The one sector which had a rise was food purchases which rose by 0.6% in March whilst every other sector fell. Looking further into the numbers large chain stores have grabbed more business as their underlying real index is at 116 whilst both department stores and small chain stores both register only 72.7. I would ne interested to hear if Spanish based readers have any thoughts or insight on what is happening here

Inflation has risen too

Unfortunately we see that what is defined as the "misery index" has seen both of its components rise this month as we see these results for Spanish consumer inflation.

"the annual change of the flash estimate of the HICP in April stood at 2.0 %. If confirmed, the annual change of the HICP would register an increase of two tenths as compared with the previous month.

This was mainly a result of the increases in prices of Electricity and Tobacco"

The HICP is the Harmonised Index of Consumer Prices and is the Euro standard measure. In the UK it is called CPI or the Consumer Price Index but somewhat confusingly Spain has a different measure called CPI as in another example does Ireland.

Misery Index

For those unaware of the Misery Index it is a relatively simple measure which adds the inflation rate (2%) to the unemployment rate (24.44%). So we get 26.44% as the Misery Index for Spain.

For her youth (16-24) the Misery Index is now 54%.

Industrial Prices are also rising

As Spain is supposed to be in the middle of the Euro's internal devaluation programme designed to improve price competitiveness seeing this was not entirely reassuring. IPRI stands for Industrial Price Index.

"The monthly variation of the general index is 0.8%

The interannual rate of the IPRI for the month of March is 3.3%, one tenth below than the rate registered in February"

So whilst the annual rate has dropped we are comparing with 2011 which was a stronger period for the economy and if we consider the weakness of Spain's economy we would not expect 2012′s monthly figures for this index to have gone 0.8%,0.6% and now 0.8%.